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257 IRET Congressional Advisory 1 (2009)

handle is hein.taxfoundation/iretcgadv0254 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. July 30, 2009 Advisory No. 257 WOULD EXPANDED 1099-MISC REPORTING NARROW THE TAX GAP WITHOUT UNREASONABLY INCREASING BUSINESSES' PAPERWORK COSTS? Executive Summary The federal government requires businesses to notify the IRS on Form 1099-MISC if they have paid various types of miscellaneous income to service providers (with one copy of each 1099-MISC going to the IRS, another to the service provider, and a third retained for the business's own records). Like better known third-party reporting forms, such as the W2, the 1099-INT, and the 1099-DIV, the 1099-MISC is a tax-enforcement tool: taxpayers are less likely to omit income from their tax returns if they know the IRS has third-party information concerning the income. A major exception to the 1099-MISC reporting requirement is that the form usually does not have to be submitted if the payee is a corporation. The Government Accountability Office (GAO) recommends eliminating the payments-to-corporations exception because doing so would slightly narrow the tax gap (the difference between taxes owed and tax payments the IRS receives.) Although GAO is correct regarding improved tax enforcement, forcing businesses to act as unpaid assistants to the IRS raises their already high tax-paperwork costs. A compromise might be to retain the payments-to-corporations exemption for small businesses because they often lack economies of scale in tax compliance but remove the exemption for large businesses. gmg* g.m 6 I lie I ~. ~6I